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Beware Of Short Sales
Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing "short sales" with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.
The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.
posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida
June 23, 2007 in Dealing With Creditors | Permalink
Comments
Am I wrong here or has the law changed on this matter? I thought the could no longer send a 1099.
Posted by: Orlando Real Estate | Jan 14, 2008 11:37:27 PM
Lawyer's are Idiots! They want people to foreclose- they make $40-$50,000.00 on a foreclosure. So of course they are going to advise you to go ahead and go into foreclosure. Foreclosure will cost you more than a few thousand dollars in tax money. Anyone selling a property as a "short sale"- should not expect to get out scott free. Just run the numbers and see the bottom line.
Posted by: Russ | Jan 8, 2008 4:45:29 PM
Short sales are looking even better right now. I noticed the inventory is raising locally. Might be a good thing for investors.
Posted by: Foreclosures Eugene | Jan 1, 2008 9:16:46 AM
Who is right? I am confused! Do you still get a 1099 if the property goes into foreclosure? I need to be 100% sure before I make a hugh mistake. Thanks Stacey
Posted by: Stacey | Oct 23, 2007 7:34:39 PM
As a CA homeowner, w/ substantial equity and some cash asset...who would like to foreclose or deed in lieu on an investmt residential home in Cape Coral- what backs up this comment of your, "Many mortgage lenders will not pursue debtors for deficiency judgments".
i don't have any way to protect my assets in CA, that i know of....so i sure hope you know what you're talking about.
any further help w/ this, gladly appreciate. my loan is Chase.
donnab2@pacbell.net
Posted by: donna | Sep 14, 2007 7:44:28 PM
does this mean that no matter if there is a short sale OR if the property goes to foreclosure that there will be a 1099 that we are responsible for not matter what? And what if we declare bankruptcy AFTER the foreclosure (if the bank comes after us for the deficiency and sells the property before we have time to declare bankruptcy), are we still responsible for the taxes on the property?
Posted by: susie | Jul 8, 2007 5:19:57 PM
Is a Deficiency Judgment from foreclosure dischargeable in bankruptcy?
Posted by: Ray Nawrocki | Jul 2, 2007 6:33:15 PM
I object your conclusion becuase of:
1. The law allows the lender to send a 1099 for the balance also in case of foreclosure
2. In florida, the foreclosre is a judment will enable the lender to go after the borrower with a deficiency judgment
3. The IRS exempt from the tax liablity when the recipient is insolven. Read IRS publications 544 and 908
Posted by: raffi | Jun 25, 2007 12:22:03 PM
